In debate over military aid to Egypt, contractual issues loom large for U.S.

As U.S. lawmakers weigh measures to restrict aid to Egypt, one crucial consideration is being largely overlooked: Shutting off the defense materiel pipeline to Cairo would take several years and ensnare the United States in an unprecedented contractual quandary.

Since the early 1980s, the United States has granted Egypt an extraordinary ability to place orders with American defense contractors that are worth far more than Congress has appropriated for military aid, according to U.S. officials. Under the mechanism, called cash-flow financing, Egypt can submit large orders for equipment that takes years to produce and deliver, under the assumption that U.S. lawmakers will continue to allocate the same amount in military aid year after year.

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Egypt — the only country besides Israel that is granted such a privilege by Washington — has effectively been given a credit card with a maximum limit in the billions of dollars, experts say.

The complex financing arrangement is making a tough policy debate over the future of military aid to Egypt far more complicated than is publicly acknowledged. Lawmakers reassessing Washington’s $1.3 billion in yearly military aid to Egypt in the aftermath of the country’s military coup have been stunned to learn just how difficult it would be to shut off the pipeline.

“It has gotten us into a situation where we are mortgaged years into the future for expensive equipment,” said Sen. Patrick J. Leahy (D-Vt.), chairman of the Appropriations subcommittee on the State Department, foreign operations and related programs. “It is not a sensible way to carry out U.S. policy toward a country of such importance, where circumstances have changed, our interests and needs change, our budget is under stress, and yet we’ve been stuck on autopilot for more than 25 years.”

During decades of autocratic rule in Egypt, the arrangement worked like a charm. The aid package delivered a windfall for U.S. defense contractors as Egypt-bound tanks, fighter planes and missiles rolled off assembly lines across the United States, gradually replacing Egypt's aging Soviet hardware and deepening that nation’s reliance on U.S.-made gear. The Pentagon cashed in on the bounty, getting expedited access to the Suez Canal for Navy ships, overflight rights for military aircraft and plenty of face time with Egypt’s generals. Egypt, meanwhile, developed one of the region’s strongest militaries.

From 2008 to 2012, Washington signed off on more than $8.5 billion worth of military orders placed by the Egyptian government, even though Congress appropriated $6.3 billion for defense aid to Cairo in that period, according to the latest data published by the Pentagon. During those five years, Egypt received equipment worth $4.7 billion.

The $3.8 billion gap between contract cost estimates and deliveries is a revealing but incomplete measure of the vast pipeline of items earmarked for Egypt that would be thrown into limbo if Washington were to cut off aid to Cairo.

U.S. officials declined to offer a more specific assessment of the value of orders that have been authorized but not delivered. They cautioned that several factors, including markups on the price tag of defense orders, partly account for the gap.

“The decisions we make about U.S. assistance to Egypt are based on our national security interests and our commitment to hastening Egypt’s quick and responsible return to a sustainable, democratically elected civilian government,” said Marie Harf, a State Department spokeswoman. “We do not believe it would be in the best interest of the United States to immediately change all of our assistance to Egypt. We are reviewing our obligations under the law and are consulting with Congress about the way forward.”

‘Our hands tied fiscally’

The potential contractual fallout from suspending aid became a key concern at the State Department in spring 2012 as officials were deliberating whether then-Secretary Hillary Rodham Clinton would sign a waiver to override conditions imposed by Congress that could have held up Egypt’s aid package, two former administration officials said. It was only then that some officials began to grasp the magnitude of the problem.

“Egypt is changing, and our relationship with Egypt is changing,” said a former administration official who was involved in Egypt policy and who spoke on the condition of anonymity to express reservations about the way the military aid program for Egypt works. “It’s increasingly volatile, it’s increasingly fluid. In a country where there is so much unpredictability, being in a situation where we have our hands tied fiscally seems to be a terrible policy stance.”

Last year, a draft memo prepared for lawmakers who were angry at a crackdown on U.S.-funded pro-democracy organizations in Cairo that was sanctioned by the Egyptian military highlighted the possible impact that a suspension of aid could have on U.S. defense contractors.

“Without the exercise of the waiver, funds would not be available to continue payments on current contracts, which would have a potentially devastating impact on the current pipeline of U.S. produced defense articles, an impact that is not readily reversible,” the draft memo warned. The final draft submitted to Congress flagged the issue, albeit in less dire language. Clinton ultimately signed the waiver.

The administration believes it would have a number of options to wind down contracts if it had to suspend aid, according to a senior administration official.

Warnings about mechanism

Egypt started acquiring U.S. defense equipment after it signed a peace treaty with Israel in 1979, ending decades of enmity that included three major wars. Eager to forge a strong bond with Egypt, which had been a Soviet-allied state for decades, Washington spared no effort in a bid to use military aid to cement its nascent alliance.

“They were disillusioned with the Russians and kicked them out and turned to the West,” said Rep. Gerald E. Connolly (D-Va.), a member of the House Foreign Affairs subcommittee on the Middle East and North Africa who worked on Egypt policy as a Senate staffer during the 1970s and 1980s. “We embraced that and, oh my goodness, what an opportunity.”

Because Egypt could not afford pricey military equipment, the White House allowed it to use cash-flow financing to place orders for jets, air-defense batteries, antitank missiles and armored personnel carriers. Congressional auditors warned in a 1982 report that the practice could have unforeseen consequences.

Cash-flow financing “appears to us to commit the Congress to large financing programs in future years to ensure that signed contracts are honored,” auditors with what is now the Government Accountability Office said in the report. State and Defense Department officials at the time told the GAO that Cairo understood that cash-flow financing did not obligate Congress to allocate money for years into the future. But the GAO argued that “it would be difficult for Egypt to interpret it any other way.”

The GAO raised the issue again in 2006 in a report that warned that policymakers had failed to “identify the risks and impacts” of a potential change in aid levels to Egypt. Defense officials told auditors at the time that they would consider a range of options if the money stopped flowing, including halting new orders and reducing the scope of contracts. But, ultimately, the U.S. government would be liable for a considerable portion of contracts placed by Egypt.

In the wake of the coup in Cairo, members of Congress have staked out contradictory positions on whether aid must be cut off under U.S. law. Leahy and Sen. John McCain (R-Ariz.) have insisted that it must. Sen. Carl Levin (D-Mich), who heads the Armed Services Committee, believes that the U.S. law requiring a cutoff in aid in the event of a coup “does not apply to direct military-to-military assistance,” a spokesman said. His position has drawn particular attention on the Hill because a General Dynamics plant where Egypt’s tanks are produced is in his home state.

Lawmakers in the early stages of drawing up next year’s foreign operations budgets are contemplating various amendments that would place further restrictions on aid to Egypt or stop it outright. Sensing the growing angst on the Hill, President Obama on Wednesday decided to halt a scheduled delivery of four F-16s, a measure that administration officials hoped would buy them time to appease members of Congress.

The Egyptians, meanwhile, have been largely silent about the debate over U.S. aid. Their embassy in Washington did not respond to requests for an interview. A former administration official involved in Egypt policy said the Egyptians may be confident that the sturdiness of the aid structure will weather the ongoing debate.

“Don’t think the Egyptian military doesn’t know that how we provide the aid constrains us from cutting it off easily,” the former official said. “They know this stuff a hundred times better than us.”

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